Creative Destruction in REIT-land

In a savings-glutted(*) world, 10% compounds nicely, even with actual inflation (ex hedonic adjustments and official smoke & mirrors that limit the State's indexed liabilities) being what it is(*. And its amazing what a difference two months make, for it seems like just yesterday bidders were falling over each other in order to disassemble Sam Zell's EOP at cap rates that were pedestrian even to optimistic pedestrians, and the Tourettic Cramer was wondering why J. Bruce Flatt (of Brookfield Props) was not a household name like Warren Buffett.

Since February, the growth-darlings of REITville (AVB, SLG, BXP, VNO, KIM, BPO with Feb P/Est FFO of approx 20X) have been savaged, and in typical Wall St. fashion, the mauling has made formerly bullish analysts much less enthusiastic. Goldman got supremely whipsawed calling mid-June a buying opp, with an about-face in early July to "Ooops, I meant Sell them to oblivion". Which they have.


Old saws like "location, location, location" aside, and irrespective of what the Jones's have making (til the end of Q1) on their leveraged CDO and CLO portfolios marked to market by the guy who gets his bonus based upon his mark, 10% is in fact a fair and reasonable return to a rentier for the rights conferred by ownership of real and good assets, lowly leveraged, and professionally managed, and protected by the powers of the state and the rule of law. A prolific gold deposit in Bolivia or DR-Congo might have more upside, but it also has more downside. Complete downside, in fact.

Back to topic. Price destruction is, as it should, creating value in US REITs. Maybe there will be more destruction. Maybe we are on the cusp of an engulfing revulsion that will finally turn Tice, Faber and DKW's Edwards into bulls. By way of example, irrespective and contrary to low price momentum, low relative growth rates, low earnings momentum, poor analyst expectations - all the things newly-minted MBAs are taught to avoid - CLI, HRP, HPT, AHT, LXP and CDR, are ALL offering P/Est FFOs of 10x or less. These are all owners of real property (be they hotels, shopping centers, suburban officesm, what have you) with good existing tenants, fine management , attractive yields, and even more attractive valuations. It's as if the huge liquidity and monetary growth of 2004, 2005, 2006 and 2007 , and their resultant impact upon asset values never happened. Yes there is probably more volatility and perhaps some more downside ahead. Yes they've been more attractively valued before. BUT liquidity remains out there, even if held by official authorities, and that liquidity will move into equity from cash or debt at the right price. And as a betting man, I would wager that US authorities do NOT turn the screws tighter amidst a downturn, irrespective of how desperately US ficsal balance requires tax increases.

Mortgage REITs (CT, RAS, NRF, NCT, RWT, AHR, NLY, TMA etc. etc.) - which have vastly different size and leverage too are screaming ... errrr... something. As are their investors, though I, even with my mis-spent youth, cannot repeat the words here without whincing. Yet I cannot help but wonder whether the more moderately levered of this group do not offer meaningful opps, somewhere, perhaps close to here. Yes, one cannot say for certain what pieces of toxic waste populate their portfolios. And I cannot honestly say I can fathom the impact of price discovery upon their portfolio. But with the flight to quality and yields going one way, should quality tenant, diversified net-lease yields (like those of LXP) really be moving in the other? Yes, the market probably knows something about RAS that we will find out only later. But in the meantime, it is worth doing some work to find out those that didn't shoot the moon, and will survive the shakeout, when we hear the definitive "THUD!" of those that DID "shoot the moon".